Don’t Mess With the G Fund from govexec.com

April 10, 2015  |   Blog   |     |   Comments Off on Don’t Mess With the G Fund from govexec.com

What is unique about the Thrift Savings Plan? Well, first of all, it’s a retirement savings plan specifically designed for federal employees and military service members. Another notable fact about the TSP is its very low administrative costs — 29 cents per $1,000 invested per year. For some 401(k) plans, such costs can be as high as $24.50 for every $1,000 invested.

But more than any of these characteristics, one thing really sets the TSP apart: the G Fund, a short-term Treasury security that is exclusive to the TSP and is guaranteed by the U.S. government. Nearly 40 percent of the money invested in TSP accounts is in the G Fund–almost $200 billion.

The G Fund aims to deliver a rate of return higher than inflation while avoiding exposure to default risk and market price fluctuations. But it’s currently at risk of losing that feature. As GovExec’s Eric Katz reported in late March,  a House Budget Committee report takes issue with how the interest rate on the G Fund is calculated, arguing that “those who participate in the G Fund are rewarded with a long-term rate on what is essentially a short-term security.”

Strictly speaking, this is true. The G Fund interest rate calculation is based on the weighted average yield of all outstanding Treasury notes and bonds with four or more years to maturity. Yet it is a short-term security.

But there’s more to the story. The G Fund was implemented in the late 1980s, when the Federal Employees Retirement System was created. During a recent appearance on Federal News Radio, Kim Weaver, director of external Affairs for the TSP, said that Congress used the same formula for the G Fund as had been used for the Civil Service trust fund and the Social Security trust fund. So the G Fund is using a method of investment valuation that has been around for more than 100 years.

The House Budget Committee says basing the G Fund on a three-month average yield instead of a four-year average would save $32 billion over 10 years. Weaver told Federal News Radio that such a shift “would drop the interest to virtually zero, which would make the G Fund worthless to our participants. It wouldn’t even begin to keep pace with inflation.”

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